RBI says biggest risk to economy stems from CAD

There is little cheer for home and car loan seekers in the Reserve Bank of India's (RBI) monetary policy for 2013-14, announced on Friday, as the interest rate was cut by a meagre 0.25 per cent and the cash reserve ratio (CRR) was kept unchanged on concerns of inflation.

The lowering of the short-term lending (repo) rate to 7.25 per cent from 7.50 per cent was lowest since May 2011.

Between April 2012 and February 2013, the weighted average lending rates of banks has come down by 36 basis points to 12.17 per cent. Transmission of RBI's signals to the end consumer is partly hampered by banks' challenges in raising cheap deposits and dealing with their bad loans.

Pratip Chaudhuri, chairman, State Bank of India, said that there is no scope for a lending rate cut now. His views were shared by other bankers as well who ruled out the possibility of rate cut in the immediate run.

ICICI Bank chief Chanda Kochhar conceded that the rates in the certificate of deposits have been going down but termed it as a cyclical phenomenon. "The present downward movement in deposit rates will not be sustained. And a lending rate cut will depend only on the movement of cost of funds," she said.

RBI governor D Subbarao defended his decision to hold CRR. "The view that the Reserve Bank can improve liquidity only by cutting the CRR is mistaken," he told reporters at the customary post-policy interaction.

"We have not cut the CRR because we believe that the liquidity deficit to the extent that it exists is not because of structural reasons." He gave out granular details of liquidity available with the banks saying they are carrying Rs 3.5 trillion in excess of statutory liquidity requirement holdings, Rs 21,000 crore in unutilised export credit refinancing and Rs 1.4 trillion in marginal standing facility.

The subtext of the monetary policy statement0 is that the government has exhausted easier options to boost economic growth and RBI is no longer going to waffle in its inflating-busting mandate. In addition to the banking system's problems and damage to business sentiment caused by governance issues, RBI believes that 2013-14 is going to be another year of relatively slow growth. RBI's forecast is that the economy will grow 5.7 per cent this fiscal, lower than the finance ministry's projection of 6.1-6.7 per cent. The Prime Minister's Economic Advisory Council forecast that the economy would grow by 6.4 per cent.

"The Reserve Bank's baseline projection of GDP growth for 2013-14 is 5.7 per cent ...The bank's current assessment is that activity will remain subdued during the first half of this year with a modest pick-up in the second half subject to appropriate conditions ensuing."

Describing the high current account deficit (CAD) as the biggest risk to the economy , RBI said any further deterioration of CAD could result in its policy reversal stance. "The biggest risk to the economy stems from CAD, which last year was historically the highest ... Monetary policy will also have to remain alert to the risks on the account of CAD and its financing, which could warrant a swift reversal of the policy stance.